Do you ever need a summary of a GASB statement? Maybe you don’t have time to read the whole pronouncement and you need a quick overview. The Governmental Accounting Standards Board provides a summary of each GASB statement on their website. Below I show you an example search for a summary of GASB 68. Start at their website: www.gasb.org
GASB 68 (Accounting and Financial Reporting for Pensions) has eaten GASB 27–RIP.
The magic date when the Great Pumpkin–the net pension liability–will rise out of the footnotes and land on the statement of net position is quickly approaching (year-ends of June 30, 2015). Instead of saying, “It’s the Great Pumpkin Charlie Brown!” we’ll be saying, “It’s the Great Debt Charlie Brown!” ARRG.
GASB 27 was a kind spook, allowing governments to bury pension liabilities in the notes. As long as public entities paid the “annually required contribution–ARC,” no liabilities were recognized on the statement of net position. But this is all changing. We have a new beast: the net pension liability–NPL, which will be recognized on the statement of net position. And, of course, as liabilities increase, equities (net positions) decrease. One saving grace: modified accrual accounting; governmental funds will not record the NPL, but the pension liability will appear on full accrual statements (i.e., government-wide statements and enterprise funds).
Under GASB 27, the ARC was treated as the funding amount. No longer. GASB 68 divorces funding from the pension expense.
So what is net pension liability?
It is the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service, less the amount of the pension plan’s fiduciary net position.
In simple terms, it’s the computed debt less assets set aside for future payments.
What journal entry will be made to record the NPL?
Initial Entry to Record Pension Liability
|Net Position (Equity)||XXXX|
|Net Pension Liability||XXXX|
Additionally, if the government previously recorded a net pension obligation (the result of the ARC not being paid), then this liability will also be removed (debited) as you record the NPL.
Governments will experience more volatility in their pension expenses since smoothing techniques are no longer used. Keep in mind that funding can (and I expect will be) fairly level. The pension expense is not intended to establish funding amounts. As a consequence, cash paid to fund the pension plan may remain fairly stable while the pension expense swings widely. Changes in the market value of pension plan investments will be felt more abruptly as they impact pension expense.
Changes Included in Current Pension Expense
Statement 68 requires that most changes in the net pension liability be included in pension expense in the period of the change. For example, changes in the total pension liability resulting from current-period service cost, interest on the total pension liability, and changes of benefit terms are required to be included in pension expense immediately. Projected earnings on the pension plan’s investments also are required to be included in the determination of pension expense immediately.
Changes Included in Current and Future Pension Expense
The effects of certain other changes in the net pension liability are required to be included in pension expense over the current and future periods. Changes in the net pension liability not included in pension expense are required to be reported as deferred outflows of resources or deferred inflows of resources related to pensions.
The effects on the total pension liability of (1) changes of economic and demographic assumptions or of other inputs and (2) differences between expected and actual experience are required to be included in pension expense in a systematic and rational manner over a closed period equal to the average of the expected remaining service lives of all employees that are provided with benefits through the pension plan (active employees and inactive employees), beginning with the current period.
The effect on the net pension liability of differences between the projected earnings on pension plan investments and actual experience with regard to those earnings is required to be included in pension expense in a systematic and rational manner over a closed period of five years, beginning with the current period.
Trick or Treat
When Charlie Brown would go Trick or Treating, he’d say, “I got a rock.” Governments, after knocking on the GASB 68 door, may feel the same way. Those entities that have not properly funded their pension plans will see sizable hits to their net position. Worse yet, a poorly funded plan is required to use a lower discount rate which increases the net pension liability.
If your government has debt covenants, it would be wise to consider the potential effects of these changes now.
It’s time to pay closer attention to two standards issued by the Governmental Accounting Standards Board (GASB):
- Statement No. 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
- Statement No. 65 – Items Previously Reported as Assets and Liabilities
What are the effective dates for Statements 63 and 65?
- GASBS 63 is effective for periods beginning after December 15, 2011; earlier application encouraged
- GASBS 65 is effective for periods beginning after December 15, 2012; earlier application encouraged
It is best to implement GASBS 63 and 65 at the same time.
What is the purpose of these changes?
To put it succinctly, GASB is using one of its conceptual statements (specifically Concepts Statement 4) to make revisions to reporting requirements (to include deferred outflows and deferred inflows).
Prior to GASBS 63 and 65, debit balances were reported on the statement of net position (balance sheet) as assets; similarly, all non-equity credits were reported as liabilities. The new standards add deferred outflows and deferred inflows to the mix.
All debit balances in the statement of net position will be reported as:
- Deferred Outflows
Assets represent present service capacity to the government; deferred outflows (e.g., prepaid bond insurance) represent the consumption of net position applicable to future reporting periods.
Liabilities represent amounts to be paid; however, some amounts previously reported as liabilities (e.g., deferred property taxes) involve no future payment. Consequently, with the implementation of GASB 63, all non-equity credits in the statement of net position will be reported as:
- Deferred Inflows
The difference in liabilities and deferred inflows is primarily resources that are going out and resources that are coming in. Liabilities normally represent a future surrender of resources; deferred inflows do not.
What are the main points of GASBS 63?
This statement distinguishes assets from deferred outflows of resources and liabilities from deferred inflows of resources.
Additionally, many of your financial statement titles (e.g., Statement of Net Position), categories (e.g., Assets and Deferred Outflows of Resources), and notes will change. Net Assets will now be labeled Net Position.
The five elements of the statement of net position are:
- Deferred Outflows of Resources
- Deferred Inflows of Resources
- Net Position
The three categories of net position are:
- Net Investment in Capital Assets
Note – The requirement to change to a statement of net position (rather than a statement of net assets) – a GASBS 63 change – occurs one year earlier than the requirements of GASBS 65; you are required to change the term net assets to net position even though you may not have any deferred outflows or inflows until GASBS 65 is implemented – possibly a year later. Again it is easier to simply implement both GASBS 63 and 65 at the same time (both can be early adopted).
What are the main points of GASBS 65?
- It identifies the specific items to be categorized as deferred inflows and deferred outflows.
- It clarifies the effect of deferred inflows and deferred outflows on the major fund determination.
- It limits the use of the term deferred in financial statements.
What are some examples of specific items to be categorized as deferred inflows and deferred outflows?
- The gain or loss from current or advance refundings of debt (the gain or loss will no longer be netted with the related debt but will be shown separately as a deferred outflow or a deferred inflow)
- Prepaid insurance related to the issuance of debt
- Property taxes received or accrued prior to the period in which they will be used
How should debt issuance costs be treated?
Debt issuance costs should be expensed when incurred. GASB concluded that debt issuance costs do not relate to future periods, and, therefore, should be expensed.
If your government has debt issuance costs (recorded as assets), you will need to remove them as you implement these standards (using a prior period adjustment).
How should cash advances related to expenditure-driven grants be recorded?
Cash advances from expenditure-driven grants should be recorded as unearned revenue (a liability). The key eligibility requirement for an expenditure-driven grant is the use of funds (which does not occur until funds are spent). Any grant funds received prior to meeting eligibility requirements will be shown as a liability. It is improper to use the word deferred for this line item; for example, deferred revenue is not appropriate. The more appropriate title is unearned revenue.
How do these standards affect the determination of major funds?
Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for purposes of determining which elements meet the criteria for major fund determination.
I well remember how confused I was when GASB 14 came out – even though Harold Monk did his best to enlighten me. Since then, I don’t know how many entities I’ve looked at, trying to determine whether they were component units. I do know I have become well acquainted with the flowchart in GASB 14; strangely enough, we have become friends (yes, I know it’s weird having a flowchart for a friend, but such is my life). We now have an updated flowchart in GASB 61 – a new friend I guess.
GASB reconsidered GASB 14 and created GASB 61, Financial Reporting Entity: Omnibus – an Amendment to GASB Statements No. 14 and No. 34. The effective date is for periods beginning after June 15, 2012.
Let’s take a look at GASB 61. First, we will consider whether an entity should be included as a component unit, and then we will look at whether the entity should be blended or discretely presented.
1. Evaluating Inclusion of Potential Component Units
First ask, “does the primary government appoint a voting majority of the potential component unit’s board?”
If yes, you will include the component unit if the primary government:
- has the ability to impose its will upon the potential component unit or
- has a potential financial benefit or burden related to the potential component unit (PCU)
If no, consider whether the potential component unit meets the fiscal dependency and financial benefit/burden criteria. If yes, then include the component unit. If no, ask whether it would be misleading to exclude the potential component unit; if it would be misleading, then you will include the PCU (normally discretely presented).
2. Blended or Discretely Presented Decision
Blend the component unit if any of the following three criteria is true:
1. If the component unit’s governing body is substantively the same (basically having the same board members) as the governing body of the primary government, then you will blend the component unit into the primary government provided:
- there is a financial benefit or burden relationship, or
- the primary government has operational responsibility for the component unit.
Operational responsibility is defined as managing “the activities in the essentially the same manner in which it manages its own programs, departments, or agencies.”
(Notice the primary government’s legal control of the component unit does not affect the blending decision.)
2. Another consideration – commonly known as the exclusive benefit criterion – is whether the component unit’s goods or services are entirely or almost entirely provided to the government itself (this does not include providing services to the government’s citizenry or customers). If the answer is yes, then the component unit will be blended.
A university foundation, for example, is usually designed to (and often does) exclusively benefit the university (the primary government) and would, therefore, be blended.
A university hospital, by contrast, will be presented discretely (in the university’s financial statements) since the hospital is primarily providing benefits to patients rather than the government. (This is true even if the articles of incorporation for the hospital state that the entity is designed for the exclusive benefit of the university.)
3. GASB 61 includes one new blending criteria: if the primary government will repay entirely or almost entirely (with resources of the primary government) a component unit’s total debt outstanding (including leases), the component unit will be blended. The standard does allow for discrete presentation if the primary government’s resources are the second source of debt repayment or if resources received from the primary government are among other sources of repayment available.
If the component unit does not meet any of the three blending criteria, then it will be presented discretely.